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Between Decentralized and Centralized Exchanges

Ethereum’s Vitalik Buterin recently condemned centralized exchanges (CEX) while Binance’s Changpeng Zhao thinks that decentralization (decentralized exchanges or DEXs) are not safer by default. The thoughts of these two industry leaders mirror rising views hovering on shifting attention from CEXs which many crypto investors are used to something new with less complaints of issues plaguing their operations.

DEXs, unlike centralized ones, do not usually require usernames, passwords and a third party holding on to users’ funds. They trade other crypto assets against one another usually using smart contracts. DEXs are growing in popularity across the industry and more users are just getting used to their interfaces. As a result, transactions on these platforms are still low. However, the future outlook favours the need for more of such platforms to exist. The market too shows that the number of new DEXs emerging with time is growing. In the last year, some of the DEXs launched include Cobinhood, Robinhood, Bancor, IDEX etc. Binance, one of the world’s top centralized cryptocurrency exchange, is also planning to launch its DEX soon. OKCoin has a similar plan too as well as others.

It is alleged that some CEXs artificially inflate their order books and volume statistics to present a positive market position which is not a reliable indicator. They are also accused of poor customer service, listing any coin without much regard to the fundamentals and other factors even as they charge exorbitant fees to do so. This plays a role in determining whether a token makes it big as it forces ICOs to try raising more to pay the listing fee. The awareness to always have access to wallet private keys is also growing as assets are not deemed owned by the investor until they are out of the centralized platform. DEXs enable users access to their private keys.

While its P2P feature comes with a forward-looking approach, a key shortcoming of DEXs at the moment is how to convert tokens into fiat and then to a user’s bank account directly via their platforms. Though the need to convert tokens into fiat may decrease with time if crypto adoption grows rapidly, it is a crucial issue for now. When they are widespread, the introduction of stable coins can help solve this exchange issue without much infrastructure or by enabling the use of tokens for direct spending. Until then, centralized exchanges would still be around to get this aspect covered.